Question

Benedict Company leased equipment to Mark Inc. on January 1, 2017. The lease is for an eight-year period, expiring December 31, 2024. The first of eight equal annual payments of $600,000 was made on January 1, 2017. Benedict had purchased the equipment on December 29, 2016, for $3,200,000. The lease is appropriately accounted for as a sales-type lease by Benedict. Assume that at January 1, 2017, the present value of all rental payments over the lease term discounted at a 10% interest rate was $3,520,000.

Answer 1

Answer:

From the calculation the interest income in 2018 = 10% of $2,612,000= $261,200

Step-by-step explanation:

The complete question states:

What amount of interest income should Benedict record in 2018 (the second year of the lease period) as a result of the lease?

To answer the question, we look at the given information

The present value given = $3,520,000

The Annual Instalmental payments = $600,000

The Period is 8 years and teh given interest rate at 10%

Based on the information we prepare the following schedule

Year 0 = Instalment + interest = Principal

$600,000 + 0 (interest) = $600,000

Balance = Present value- Principal

Balance = $3520,000 - $600,000 = $2,920,000

Year 1 (2017) = Instalment + interest = Principal

$600,000 + $292,000 (10% of $2,920,000) = $308,000

Balance = Present value- Principal

Balance = $2,920,000- $308,000= $2,612,000

Year 2 (2018) = Instalment + interest = Principal

$600,000 + $261,200(10% of $2,612,000) = $338,000

Balance = Present value- Principal

Balance = $2,612,000- $338,000= $2,350,800

From the calculation the interest income in 2018 = 10% of $2,612,000= $261,200